Fly on WallStreet

When I asked Broker what the ingredients of a great trader were, I was a bit surprised by his answer. In his response, "The Fly" noted that he had more faith in fundamental analysis than in technical analysis-- but that wasn't terribly surprising. We already know that Broker's approach is largely based on the identification and prediction of the kinds of macroeconomic trends that are likely to benefit the stocks of quality companies. As such, it should also come as no surprise that he considers conference calls and the anecdotal evidence that we gather as consumers to be of great importance. But I was surprised by the idea that books weren't enormously helpful in his own journey to become a great trader. (Usually, you can ask any trader what their favorite books are, and they'll be more than happy to fire off a long list.) Despite this, he was able to offer me one suggestion: that I should "read Dan Reingold's new book [Confessions of a Wall Street Analyst] to see how Wall Street really works."

I was a bit surprised that he recommended a book about corruption on Wall Street, since I was probing for something a little more along the lines of "How to Make Money Hand Over Fist." Nevertheless, I thought that the book would be a good read if only for its account of the professional life of a sell-side analyst and its unique perspective on the tech (or in this case, telecom) bubble. In fact, this book report was going to briefly summarize and then explore those accounts. However, after spending some time writing this report and letting the book fully digest, I now believe that the real take-away from it lies in the fact that it forces us to think about a reality that is both emotionally difficult for individual investors to honestly confront and also profoundly important-- the idea that the average investor is hopelessly disadvantaged.

Having read both Liar's Poker and Den of Thieves in the past few months, I knew that Reingold's book would probably conclude with a warning to the individual investor, something like, "Wall Street is completely corrupt, and the only people that are making any money are the insiders who are trading on the kind of material, non-public information that small dicks like you won't get until it's too late." Sure enough, Broker went on to comment that "the sad truth is, the average investor is at an extreme disadvantage to the big dogs. Valuable information is passed along everyday, while Joe Schmo on Fast Money recommends YHOO before earnings."

Now that I've had some time to reflect on that message, I think I'm starting to appreciate the gravity of that statement (a statement that, given how discouraging it is, most of us -- myself included -- would like to simply "put on the shelf"). Now, it certainly is true that the pikers out there love to use the corruption on Wall Street as an excuse for their losses in the market. You know the people I'm talking about-- the ones who blame their stupid trades on the effects of insider trading, dishonest accounting, or "the unlawful and evil manipulation of the market by hedge fund managers." You've surely heard those excuses before, and you probably just wrote them off as huge exaggerations of the real impact that those things have. After all, how often do they really come into play? Admittedly, they probably do cause the unwashed to lose money every now and then, making the playing field at least somewhat uneven; but at the end of the day, the field is still even enough to play on, isn't it?

Honestly, I'm not sure. Even I'm beginning to doubt whether I could ever crush the averages year after year as "The Fly" does (and I'm neck and neck with the S&P, so I don't really have any reason to be as bitter and cynical as the pikers are). Don't get me wrong -- I'm sure that there are a few retail investors who do really well...but how many of them are there? Looking around at all of the other blogs, it's evident that even with a lot of effort, most of the average investors out there (of which Fly on WallStreet's reader base is largely composed) aren't making the cut. So let's call a spade a spade: how many of you can honestly claim that you've done anywhere near as well as Broker has over the past few years? How many of you can even claim that you're doing as well as he is this year? I'll be the first to admit that I don't even come close in either case. That being so, I think that we might benefit from taking a good, long look at what our realistic potential as retail investors might be (and how we might achieve that potential).

In the next part of the article, I'll try to expand on the topic and explain why I'm optimistic that the average investor can be successful in the market. Until then, I hope that everyone will offer their own opinion on these matters. Where do you stand on the individual investor's potential to succeed (as opposed to the potential of a well-connected professional money manager)? What have you found that works on Wall Street? To what extent is the average investor disadvantaged?

"More on this later-- I'm busy playing Counter-Strike."

# posted by Jeremy @ 6:49 PM